A perspective on the financial system through COVID and beyond

Introduction

Thank you for the opportunity to speak with you tonight.

It is an honour to be back at the University of Western Australia delivering the Shann Memorial lecture.  

I would like to begin by acknowledging the traditional owners of the lands on which we are meeting tonight – the Whadjuk Noongar people. I acknowledge their continuing connection to land, water and community. I wish to pay my respects to elders past, present and emerging. And to extend my respect to First Nations Peoples joining us tonight.

I wish to thank Professor Peter Robertson, the UWA Business School, and the Economics Society of Australia for hosting this event.

Like those who have previously delivered this lecture, I too reviewed the life of Edward Shann and his significant contributions to Australia’s intellectual debate.

I was interested to see the experiences we had in common – the University of Western Australia, the London School of Economics, and roles in economic policy, both domestic and international. 

However, I cannot claim to have predicted the future as he did in his 1927 essay, The Boom of 1890 – and now.

I do, however, share an interest in understanding the past as a foundation for considering the future.

In part, this is because UWA insisted I study economic history in my degree.

Tonight, I draw on my perspective of the past few years to provide some observations on the financial system during the Covid-19 pandemic[1].

More than two and a half years on, the effects of the pandemic are still being felt. This includes in the financial system, which is made up of a complex interaction of laws, standards, contracts, infrastructure, and entities that cross national borders.

Our financial system underpins almost all actions in a modern economy, ensuring that payments flow, that savings get turned into investments and that risks are allocated and managed.

When the financial system is working well – it is hardly noticeable.

When it goes wrong – it can be devastating for individuals and entire economies.

In the decade between the global financial crisis and the onset of Covid-19, there was a large amount of regulatory action and structural change in the financial system.

That action was aimed at improving its resilience and ensuring that the financial system wasn’t again the cause of economic turbulence. However, no-one can be certain how such a complex system will react when something unexpected happens. 

To date, much of the economic policy debate in response to Covid-19 has been about the headline acts of fiscal and monetary policy[2]. That is understandable – they did a lot of heavy lifting.

However, I contend that if the support player – the financial system – had not proved resilient, the outcomes for the economy would have been much worse.

With this in mind, I would like to draw out some policy actions that I believe were important for the financial system during the height of the crisis, and finish by touching on some future challenges for the financial system.

While the outbreak of Covid-19 was of increasing concern in China in early 2020, it wasn’t until late February, with the outbreak spreading to other nations, that it became clearer the global financial system was about to have its resilience tested.

The declaration by the World Health Organisation of a global pandemic on 11 March 2020 occurred alongside unprecedented lockdowns, domestic and international border closures, and other public health measures.

For many of us, this wasn’t just a test of the resilience of the global financial system, but also a test of us as individuals.

Within the financial system, with the lessons from the global financial crisis still front of mind, policy makers reached into their drawers and pulled out their crisis management toolkits.

What followed was an intense and complex period of policy making.

The main outcome for the financial system was that it absorbed, rather than amplified, the shock.

It is worth pausing here and considering how remarkable that achievement is.

There were moments of acute stress and a need for unprecedented actions from public authorities.

Those actions were important in achieving such a positive outcome.

I would like to draw out 3 sets of actions:

• the role of liquidity, particularly US dollar liquidity, in maintaining confidence in the global financial system;
• the wide variety of tools that were used to shift resources between different balance sheets in the Australian economy – which helped reduce the pro‑cyclicality of risk aversion; and
• the importance of coordination between institutions.

Global Liquidity

The first observation I would like to draw out is that actions to support global financial liquidity were important for maintaining confidence in the financial system at the height of uncertainty. 

Australia’s financial system is highly integrated with the global system.

On average, our banking system draws 20 per cent of total funding from overseas markets[3]. Other Australian companies borrowed three-quarters of their total bond market issuance from offshore markets over the past 5 years.

As such, a stable global financial system is vital to our economic interests.

Ensuring adequate liquidity in the financial system during a crisis is critical for maintaining confidence. Investors need to know they can make flexible choices about what to do with their funds if they are to trust the system.

Within the global financial system, it is the international reserve currency – the US dollar – that is ultimately called on to maintain liquidity. It is the essential global financial lubricant.

That’s why, historically, it has been the liquidity actions of the US Federal Reserve that anchor the global financial system in times of turbulence.

In the lead up to 2020, questions were raised about what role the US Federal Reserve might take in the event of another financial crisis.

The Federal Reserve was evaluating its use of quantitative easing measures used during the global financial crisis that had massively expanded its balance sheet. And the US Administration was placing unprecedented public pressure on the leadership of the Federal Reserve.

Yet US dollar liquidity was becoming even more central to global financial resilience. For example, in the period ahead of the pandemic, around 80 per cent of capital flows to emerging market economies (EMEs) were denominated in foreign currency, mostly US dollars[4].

And the size of these flows was increasing. EMEs external borrowing rose by 5 percentage points of their GDP over the 9 years to 2019.

Thankfully, as it turned out, concerns about the role of the US Federal Reserve proved unfounded. The clear and present danger posed by Covid-19 resulted in an unprecedented policy response and coordination to support liquidity in the financial system.

Let’s step through some of what happened.

In March 2020, there was a significant dash for cash, a flight to safety and a repricing of risk. Investors were looking to sell assets they perceived to be risky in exchange for highly liquid cash and other assets perceived to be safer.

Liquidity deteriorated, even in the US government bond market, commonly seen as one of the deepest and most liquid financial markets.

There was extreme volatility in stock markets. For example, on 16 March 2020 the VIX (volatility) Index reached an all-time high of 82.7, surpassing its previous GFC record of November 2008. And there were large declines in asset prices – on this same day the S&P 500 fell 12 per cent and the ASX 200 fell 10 per cent.

Exchange rates also moved sharply. The US dollar appreciated by 7 per cent in 7 days in mid-March against its trading partners, while the Australian dollar depreciated by 11 per cent in the same period against the US dollar.

Financial conditions tightened sharply.

All this put severe strains on offshore US dollar funding markets, particularly for EMEs.

However, central banks around the world took decisive action – initially relying on traditional policy tools such as foreign exchange interventions and central bank liquidity supports.

But they also turned to new tools, such as selling foreign reserves and large‑scale asset purchases. For example, EME investors (primarily central banks) sold over US$150 billion of US government bonds in March 2020[5].

However, this action by EME authorities would not have been enough. Ultimately, EMEs also needed advanced economies, particularly the US, to act.

The impact of the US Federal Reserve’s actions in mid-March was clearly important in restoring confidence and shaping the expectations of market participants.

Over 6 days in March 2020, the US Federal Reserve announced measures that specifically targeted US dollar funding pressures outside the US:

• they took coordinated liquidity actions with 5 central banks that had standing US dollar swap lines[6];
• they established new temporary US dollar swap lines with 9 other central banks/monetary authorities[7]; and
• created a new Federal Reserve Foreign and International Monetary Authorities Repo Facility[8].  

By the end of March, the total take-up of US dollar central bank liquidity had reached an unprecedented $US439 billion[9].

As a result, despite all the turbulence by mid-April, markets were more or less working, and the sense of panic had started to ease.

It could have all gone horribly wrong. If a major institution had fallen over, if there had been a wholesale lock out of some markets, the loss of trust in the value of payments would have been disastrous. Especially at a time when so much was being tested on so many fronts.

The amount of detailed work, agreement making, and mechanical implementation required to undertake this liquidity support should not be underestimated.

Such a rapid response relied on the network of relationships, trust and know-how that had been built up over a decade of cross-border policy work. More on this later.

Importantly, these policies worked because the core of the system, such as banks and financial market infrastructure, proved resilient. Post-GFC reforms to increase bank capital requirements and more rigorous liquidity requirements largely prevented banks from becoming amplifiers of the shock[10].

This meant central banks were able to concentrate on managing liquidity and lowering the cost of borrowing rather than bailing out individual financial institutions.

Australia was not on the sidelines.

The RBA similarly stepped in and used open market operations at this time to make sure the domestic financial system had enough liquidity to prevent dislocation[11]. 

In particular, dealers in the Australian Government bond market were facing severe balance sheet pressures in March 2020. When the RBA stepped in to buy government bonds, they provided significant support to these dealers. As a result, dealers were able to adjust their balance sheets that were showing signs of significant distress. If crucial elements of the bond market had faulted at this time, it would have proved much harder for the government to fund the pandemic programs such as JobKeeper and JobSeeker.

Elsewhere, our financial market infrastructure also faced significant stress, but thankfully, supported by some targeted regulatory interventions, they stood up to the test. For example, the volume of trades across the ASX and Chi-X (now Cboe) reached 7 million on 19 March 2020, more than double the previous record of 3.3 million.

In short, without the resilience of the financial system, it would have been much harder for governments to act elsewhere. 

Without confidence in the financial system, it would have been much harder to maintain the broader confidence and trust needed to get through the early days of the pandemic. Toilet paper is one thing – bank runs are another thing entirely.

However, liquidity would not have been enough.

Balance sheet shifts  

The second observation I would like to draw out is the wider variety of policy tools deployed in this crisis, enabling resources to shift between different actors and balance sheets within the economy.

Government balance sheets supported the economy in direct and indirect ways

One of the most explored aspects of the economic response to Covid-19 has been the role of direct government spending and taxation – and it was extraordinary.

The Australian Government committed over $314 billion in direct economic support during the pandemic, with states and territories estimated to have committed an additional $233 billion.  That is equivalent to 26.5 per cent of GDP.

And while that level of government fiscal support continues to be a focus of debate, as it should be given it is effectively borrowing from future generations, I want to explore other aspects of policy that have received less attention – the support actors in our pandemic movie.

The Government’s guarantee of bank lending helped reduce risk scarring

The Australian Government used its balance sheet to indirectly support lending to households and small businesses.

The Small and Medium Enterprise Guarantee Scheme was first introduced in March 2020 and was available in different phases until June 2022[12]. Its policy parameters were adjusted as new phases were developed, with the government guaranteeing between 50 to 80 per cent of new small business loans issued by eligible lenders.

By the time the last scheme closed for new loans, over 104,000 loans had been finalised with a total value of over $15 billion – around 8 per cent of lending to SMEs over the program’s life.

What is more difficult to measure – but I believe is true – is the behavioural impact this scheme had in stopping the banking system from pulling back too far from lending through unwarranted risk aversion. During past shocks, such ‘risk scarring’ has been observed to delay a return to lending once the peak of the crisis had pasted.

One clear lesson from implementing this program has been the importance of maintaining existing lending processes and requirements between banks and consumers. This helped mitigate fraud risks and allowed the banking system to transition to more usual arrangements at the end of the scheme[13].

Securitisation market support helped non-banks and competition dynamics

The Government’s balance sheet was also used to support the securitisation market, complementing action taken by the RBA to reduce bank funding costs through its Term Funding Facility.

The securitisation market has become increasingly relevant for non-bank lenders. Going into the pandemic, nearly 40 per cent of residential mortgage-backed bonds on issue were originated by non-banks.

The Structured Finance Support Fund (SFSF) was announced on 19 March 2020 with the Australian Office of Financial Management (AOFM) committing up to $3.8 billion to investment across several warehouses and transactions. The AOFM also created a forbearance special purpose vehicle (SPV) that allowed non-bank lenders to offer interest rate deferral like those in the banking system.

The SFSF and SPV are widely regarded by industry as having restored confidence and order to the securitisation market, particularly for non-bank issuers – with record public non‑bank securitisation issuance of $38 billion in 2021, compared with $24 billion in 2019[14].

Supporting the securitisation market also ensured that the full range of financial firms emerged from the pandemic – an important outcome for competition in lending markets.

Tax debt relief provided liquidity support

The Australian Tax Office paused most of its debt collection activities – with collectable debt increasing by $13.3 billion between July 2019 and February 2022.

This was a liquidity injection into the economy from the government balance sheet, as these debts would ordinarily have flowed to the Government.

To put this into context, this support was about the same size as the Australian Government’s first fiscal package during the global financial crisis[15].

The RBA’s balance sheet supported the financial system and beyond

During the pandemic the RBA, like other central banks, used its balance sheet to help ensure the flow of credit and to reduce interest rates in the near term and further out over the yield curve[16].

The combined actions by the RBA have significantly supported the balance sheets of households and firms over the period since March 2020. The value of the RBA balance sheet peaked at around $650 billion in March 2022 – 29 per cent of GDP – up from its pre‑pandemic level of around $170 billion.

Having used different policy tools in recent years, the RBA is now calibrating policy across different transmissions channels, some with longer time lags than usual.

It is currently in a tightening cycle, having raised its policy interest rate by 225 bps in recent months[17].  And yet, past actions are still providing funding support. This is because it is the stock of assets on the central bank’s balance sheet that provides economic support, rather than the flow[18]. Plus, the Term Funding Facility is still providing support to banks.

Domestic banks stepped in to help

The Government’s and the RBA’s actions supported the balance sheets of the private banks, who, in turn, supported households and small businesses.

Australia’s largest banks went into the pandemic with some of the healthiest balance sheets and highest capital levels in the world. This was in response to the call for Australian banks to be ‘unquestionably strong’ following the Financial System Inquiry of 2014, and Australian Prudential Regulatory Authority’s (APRA) subsequent actions[19].  

In March 2020, Australia’s banks, supported by APRA, started using their balance sheets to provide deferrals to household and small business lenders impacted by Covid-19.

While there is not a clear link between the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and the deferral actions of the banks, maintaining their overall social licence would have been one aspect of their considerations.  

At the peak of this support in May 2020, around 715,000 housing and small business loan facilities were subject to a repayment deferral – with a value of around $248 billion[20]. This was around 11 per cent of housing loans and around 18 per cent of small business loans[21].

To put this is some context, these deferrals meant that banks were providing households and small businesses with more than one billion dollars in liquidity support each month from their own balance sheets[22].

Once again, there was a positive behavioural aspect to this action. The reduction in uncertainty and worry for households and small businesses amid all that was happening in mid-2020 boosted confidence. It strengthened the sense that, together, we would come through the pandemic – an example of ‘team Australia’.

Having strong capital and credit standards going into the pandemic underpinned the ability of our banks to offer deferrals, as it was clear that most of the forbearance was for ‘good or temporary’ reasons. This was important for maintaining trust in our banks amongst their funders, here and overseas.

The bank’s strong capital and liquidity positions leading into 2020 also meant that they could sit out the extreme global financial system volatility at the start of the pandemic.

Equity markets played their role

Banks and securitisation markets are not the only sources of funding, particularly for our larger firms. The Australian equity market once again proved resilient – total equity raisings exceeded $41 billion at the start of the pandemic[23].

In part, this is because of the important role of our largely unleveraged superannuation sector. However, the Government and Australian Securities and Investment Commission (ASIC) also took regulatory steps to ensure that the market could continue to function[24].

These regulatory actions were designed to reduce the physical friction caused by Covid-19 and to prevent unwarranted risk aversion from slowing necessary capital raisings.  

Superannuation savings were made available quickly and easily

Superannuation has become an increasingly important component of Australian households’ savings. In March 2020, the Government announced it would expand and expedite the existing economic hardship access arrangements – allowing individuals and sole traders directly impacted by Covid-19 to access up to $20,000 of their superannuation, tax free.

The cash injection into households’ balance sheets from superannuation was fast. The funds released from superannuation were equivalent to just over half of all the direct government spending that went to households in the period leading up to end‑June 2020[25].

The support was also large. Over the two phases of the program, around $38 billion was approved for release, which is around 40 per cent of the overall support provided to firms by JobKeeper[26].

This program did not appear to compromise the superannuation system – it represented just over one per cent of total assets in the superannuation system, or less than one third of the total contributions made in the 12 months to March 2020, or less than half of benefits paid out.

The early release of superannuation could have an impact on individuals’ future retirement savings, depending on their subsequent savings behaviour. However, the program did give agency to people at a time of great uncertainty. Individuals were, by their own direct actions, able to access a significant increase in their liquid savings.

Aggregate impact on household balance sheets is clear to see

In short, the Government, its agents and regulators, the banking and superannuation sectors all supported households’ and business’s balance sheets throughout the pandemic.

The flow of household savings reached a high of 23.7 per cent of disposable income in the depths of the Covid-19 restrictions, when activity was also restricted. And it has still not yet to return to pre-pandemic flows[27].

This flow of savings, combined with increases in asset prices, has resulted in households’ net wealth reaching 10.4 times their annual income. This is the highest level on record – up from 8.6 times pre-pandemic.

At the start of the pandemic, no-one was thinking that households and the economy would come out of the shock in better shape – it is a remarkable outcome.

The substantial shifts in income between different balance sheets in the economy meant that money flowed to where it needed to be to stabilise confidence and activity.

And the breadth of tools used to target specific decision makers and risks was unprecedented.

I believe that these tools also helped to reduce the pro‑cyclicality of risk aversion within financial decisions makers – be they lenders, investors, dealers, or savers – reducing both the depth of the Covid-19 downturn and supporting the subsequent speed of the recovery.

We have observed a virtuous circle.  Fiscal and monetary policy supported the balance sheets of households and firms. This reduced their risks and expected losses, which indirectly supported the bank’s balance sheets. Other tools also provided targeted support. This all made it easier for the financial system to support economic activity, starting the circle again.  This is the reverse of the vicious circle observed in other crises.

Coordination of action and importance of institutions

The last observation I wanted to draw out is the importance of effective cross‑border cooperation, coordination, and information sharing.

Reacting in real time to genuine surprises is remarkably difficult for a range of practical policy making reasons: interpreting what is happening; establishing legal authority if new tools are required; building mechanisms for delivery; ensuring appropriate accountability; and building confidence in the delivery mechanism.

This is not just the case for financial regulators, but it is why using existing mechanisms has become somewhat of a mantra in policy making circles.  

To have effective coordination and decision making you need strong and coherent institutions.

One of the core lessons of the global financial crisis that was taken to heart by regulators was that the core of the financial system was wider than just a single regulator’s domestic institutions and actors.

Open financial flows across borders create risks, as it becomes possible for countries to practice selfish policies that could cause disorder and negative externalities on other countries.

Coordination is important – through, and by, institutions such as the G20 Finance Ministers’ process, the International Monetary Fund, the Financial Stability Board, and the myriad of standard setting bodies and regulators that shape and govern the global financial system.

But you can’t wait until a crisis to build relationships and trust. Regulators need to work together outside of a crisis so that when significant action is required it can be taken smoothly and with confidence.

In Australia, the Council of Financial Regulators plays such a role.

Our network of health advisers and regulators were also crucial during Covid-19, given the nature of the shock.  

In short, institutions and their governance matter – always and everywhere.

Structural forces shaping the future

Having examined some features of the financial system through the pandemic, I now turn to the future.

There are 4 structural changes I want to touch on that I think will shape the future of the financial system here and overseas: the transition to net zero emissions; digital technology; demography; and, lastly, geopolitical tensions.

Climate change

First, the transition to net zero emissions to tackle climate change will result in significant shifting of risks and financing flows.

While there is much uncertainty, McKinsey recently estimated that US$275 trillion of global spending on physical assets is needed to reach net-zero by 2050.

Shifts in financial flows are already happening. For example, more than US$130 trillion of private capital is owned or managed by financial institutions that have committed to net zero targets, including Australia's big four banks. And, since 2016, the global annual sustainable debt issuance has increased twelve‑fold.

To help this transition, domestic and international policy makers are working towards regulations that will guide the actions of the private sector, including actors in the financial system.

Domestically, the Australian Government has committed to working with regulators to ensure there is a standardised reporting requirement for climate-related disclosures that align with international standards.

The adoption of climate change disclosure obligations will have far reaching implications for the financial system.

Digital technology

Second, digital technology will continue to shape the structure of financial institutions and the way consumers interact with them.

The pandemic pushed technology to the forefront and placed us on an accelerated path for all things ‘digital’.

In our 4 major banks, we see different business strategies, as they make different assessments about future opportunities and risks from the digital transformation.

For example, ANZ and Westpac both include Banking as a Service as part of their strategy. Additionally, Westpac has plans to shift towards a wholly digital mortgage application process. While NAB intends to move all its systems to the cloud. The Commonwealth Bank is partnering with start‑ups via its x15ventures initiative to innovate its core banking services.

Like other central banks, the RBA and others are exploring use cases for a potential central bank digital currency (CBDC).

A possible benefit of such a digital currency could be money that is programmable – allowing for instantaneous and automated settlement of asset transactions without exposure to settlement or counterparty risk.

Or it could make for cheaper and faster cross-border payments by simplifying a process that now involves multiple intermediaries and significant delays. Or, with declining cash use, a CBDC could allow the public direct access to digital, risk-free central bank money – providing a monetary anchor in a digital ecosystem.

All these options are yet to be ‘proved up’ – but represent interesting prospects in the deployment of a new technology.

CBDCs are only one example of how assets can be potentially digitised. More broadly, digitisation of assets has the potential to create new businesses processes. We are starting to see real-world assets being programmed and powered by smart contract applications that have the potential to deliver significant efficiency gains.  

In such a fast-shifting landscape, it is important that regulatory systems also adapt so that reform opportunities are not lost, but also so that unwelcome regulatory arbitrage does not lead to unacceptable risks.

Something I have observed over time is that, at the margin, it is better to have slightly overlapping regulations rather than chasms between regulatory perimeters. It is in the in‑between-spaces where most consumer harm and financial instability arises. This is certainly the situation in payments and digital technologies.

Demography

With all the focus on new developments – climate change and the push to digital – it is easy to overlook longer running structural forces that are still playing out.

An ageing population is one of these forces.

One way to comprehend how Australia’s age structure is shifting is to consider the number of people of working age (15-64) relative to those aged over 65.

In 1981-82, there were 6.6 people of working age for every person over 65 – in 2019‑20 this was down to 4 – and by 2060‑61 the Intergenerational Report suggests there might only be 2.7.

This fall presents opportunities and challenges for all parts of our economy, including the financial system.

As people get older, they also tend to hold more wealth. While housing will continue to be an important source of wealth, superannuation will increase in importance as the system matures.

Over the next 20 years, the median superannuation balance at retirement is projected to grow from $214,000 to $387,000. As such, the role of superannuation in retirement will become increasingly important.

Looking across the system today, there are gaps in the range and sophistication of products that effectively manage the different stages of retirement, including products that better link to aged care and manage longevity risk.  

The interconnections between the private provision of income and services in retirement and public provision, through pensions, aged care, and the health system, are areas worth further consideration.

Geostrategic shifts

Finally, we have seen an increase in geostrategic tensions, with a notable step-up this year around the Russian invasion of Ukraine. This is against the backdrop of ongoing jostling for influence over international institutions and standard setting bodies, and pressures on international norms.

The G7, Europe and likeminded nations have responded to Russia’s aggression with unprecedented sanctions against its financial system. This includes restricting access by the Russian Central Bank and businesses to the international payment system and SWIFT – Society for Worldwide Interbank Financial Telecommunications. Trade sanctions have also been underpinned by restricting access to trade insurance.

How things have played out so far has illustrated the power of collective action, its limitations, and dynamic consequences. As we have seen, sanctioned countries adapt to sanctions – and sanctions need to keep adjusting.

Widening the sanction policy toolkit to include new aspects of the financial system is causing some countries and institutions to see financial sanctions as a vulnerability to be mitigated. As such, it may be the case that we will see a lessening of global financial integration.

I don’t want to overstate this pressure, as most financial system participants continue to value their access to the existing system and there are few alternatives in place now and certainly not at scale.  

But we need to learn to navigate in an environment where financial actions are part of the international landscape with increasing tensions.

Conclusion

Looking through past lectures, it is a fitting legacy that many have used this address as an opportunity to canvass recent historical events.

Past thought leaders, such as Edward Shann, have taught us the importance of learning from our actions so that we can build better public policy.

My comments to you today attempt to do the same.

I want to emphasise that a stable and efficient financial system is crucial to resilience and productivity growth that, in turn, underpins future prosperity.

In particular, I have highlighted the importance of liquidity, balance sheet adjustments and strong institutions in times of crisis.

While fiscal and monetary policy will likely remain the main actors in any crisis, no crisis toolkit is complete without strong supporting actors such as financial system policies.

Looking ahead, aside from likely future crises, we need to learn to navigate the deeper structural forces of responding to climate change, adjusting to the digital transformation, ageing populations, and managing geostrategic tensions.

On that note, I thank you again for the invitation tonight.

I hope I have contributed to the debate – thank you for your attention.

Footnotes

[1] Over the period 2019-2022 I was a Deputy Secretary at the Department of the Treasury with responsibility for the Macroconomic Group and subsequently the Markets Group.

[2] For an overview of fiscal policy see: The Treasury, Steven Kennedy - Sir Leslie Melville Lecture 2022 - A tale of two crises: reflections on macroeconomic policy responses to the GFC and the pandemic, 27 July 2022, https://treasury.gov.au/speech/2022-sir-leslie-melville-lecture#_ftn15. For a discussion of monetary policy see:

• Reserve Bank of Australia, Phillip Lowe – COVID, Our Changing Economy and Monetary Policy, 16 November 2020, https://www.rba.gov.au/speeches/2020/sp-gov-2020-11-16.html.

[3] Reserve Bank of Australia, “The Nature of Australian Banks Offshore Funding”, 12 December 2019, https://www.rba.gov.au/publications/bulletin/2019/dec/the-nature-of-australian-banks-offshore-funding.html

[4] Financial Stability Board, “US Dollar Funding and Emerging Market Economy Vulnerabilities”, 26 April 2022, https://www.fsb.org/2022/04/us-dollar-funding-and-emerging-market-economy-vulnerabilities/

[5] Financial Stability Board, “US Dollar Funding and Emerging Market Economy Vulnerabilities”, 26 April 2022, https://www.fsb.org/2022/04/us-dollar-funding-and-emerging-market-economy-vulnerabilities/

[6] Bank of Canada, Bank of England, Bank of Japan, European Central Bank, Swiss National Bank.

[7] Australia, Brazil, Denmark, Korea, Mexico, New Zealand, Norway Singapore, Sweden. The RBA and the Federal Reserve announced they would establish a US$60 billion swap line to provide US dollars in exchange for Australian dollars.

[8] In our region, this included the Federal Reserve entered an arrangement with Indonesia’s central bank to provide a $60 billion repurchase facility.

[9] Financial Stability Board, “US Dollar Funding and Emerging Market Economy Vulnerabilities”, 26 April 2022, https://www.fsb.org/2022/04/us-dollar-funding-and-emerging-market-economy-vulnerabilities/

[10] Financial Stability Board, Lessons Learnt from the COVID-19 Pandemic from a Financial Stability Perspective: Final report (Page 4), 28 October 2021, https://www.fsb.org/wp-content/uploads/P281021-2.pdf

[11] Reserve Bank of Australia, The Response by Central Banks in Advanced Economies to COVID-19, 10 December 2020, https://www.rba.gov.au/publications/bulletin/2020/dec/the-response-by-central-banks-in-advanced-economies-to-covid-19.html

[12] The Treasury. SME Recovery Loan Scheme, https://treasury.gov.au/coronavirus/sme-recovery-loan-scheme

[13] This contrasts with the experience in the United Kingdom with the Bounce Back Loan Scheme.

[14] KangaNews Activity Review, Feb/Mar 2022 https://www.kanganews.com/news/14770-activity-review-filling-the-void

[15] The size of the first fiscal package in the GFC was $10.4 billion, see Gruen, The Return of Fiscal Policy, 8 December 2009, https://treasury.gov.au/sites/default/files/2019-03/The_Return_of_Fiscal_Policy.pdf

[16]  Reserve Bank of Australia, Shann Memorial Lecture: Guy Debelle, Momentary Policy During COVID, 6 May 2021 https://www.rba.gov.au/speeches/2021/sp-dg-2021-05-06.html. Reserve Bank of Australia, An Assessment of the Term Funding Facility, 16 September 2021, https://www.rba.gov.au/publications/bulletin/2021/sep/an-assessment-of-the-term-funding-facility.html 

[17] Reserve Bank of Australia, Cash Target Rate, 2022, https://www.rba.gov.au/statistics/cash-rate/

[18] Bank of England, IEO evaluation of the Bank of England’s approach to quantitative easing, 13 January 2021, https://www.bankofengland.co.uk/independent-evaluation-office/ieo-report-january-2021/ieo-evaluation-of-the-bank-of-englands-approach-to-quantitative-easing.  Reserve Bank of Australia, Shann Memorial Lecture: Guy Debelle, Momentary Policy During COVID, 6 May 2021 https://www.rba.gov.au/speeches/2021/sp-dg-2021-05-06.html.

[19] The Australian banking system’s total capital ratio increased from 11.9 per cent in 2014 to 15.7 per cent in 2019 and now stand at 17.2 per cent.

[20] By December 2020, the stock of SME and housing deferrals was down to $48 billion and by October 2021 (the most recent data published by APRA) it was down to $8 billion.

[21] There were also around 181,000 other loan facilities subject to repayment deferrals, with a value of around $18 billion.

[22] This calculation only considers the liquidity support of the interest pause. It uses the weighted average interest rate of bank debt during this time of around 3.6 per cent and applies it to the stock of deferrals. However, the pause in capital repayments was an additional liquidity support during this time, although harder to calculate.

[23] This was over the period March to October 2020. Australian Securities Investments Commission (ASIC) Submission to the Treasury Laws Amendment (2021 Measures No.1) Bill 2021  - Appendix 2, June 2021, Submissions – Parlia...~https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/REFSTLABMeasuresNo1/Submissions

[24] Regulations were eased to allow for virtual meetings, e-signing and electronic meeting notices. Continuous disclosure regulations were temporarily amended so that companies and officers would only be liable if there had been ‘knowledge, recklessness or negligence’, with respect to updates on price sensitive information to the markets.

[25] APRA data (Australian Prudential Regulatory Authority, COVID-19 Early Release Scheme – Issue 10, 6 July 2020,  https://www.apra.gov.au/covid-19-early-release-scheme-issue-10) shows that $18.1 billion of early release payments were made up until 28 June 2020. As at 23 July 2020, total COVID response package subtracting any payments to businesses, aviation and health measures gives total spend of $35 billion (see page 7 - 8): Australian Government, Economic and Fiscal Update, 23 July 2020, https://archive.budget.gov.au/2020-21/jefu/downloads/fact_sheet_overview.pdf.

[26] In the first phase, starting in April 2020, 2.45 million applications – worth $20 billion – were approved. In the second phase, July - December 2020, 2.1 million applications – worth $18 billion – were approved. Australian Taxation Office, COVID-19 Early release of super report (20 April – 31 December 2020), 5 April 2021, https://www.ato.gov.au/Super/Sup/COVID-19-Early-release-of-super-report-(20-April---31-December-2020)/?anchor=Applicationsbyfinancialyear#Monthlyapprovalsandaccumulatedvalue

[27] The household savings ratio is currently 8.7 per cent vs the pre-pandemic 10-year average of 6.4 per cent.